Tag Archives: investment advice

US Health Care System Ranks Dead Last

healthcare reformMy Comments: For the past several days I’ve been involved in a fantastic LinkedIn discussion about why so many foreigners come to this country for medical care when we rank dead last in globally published metrics. The gist of it is that if you can afford it, we are fantastic, but if you can’t, then you might as well plan to die early. It’s not quite that bad but…

The medical people responsible for exceptional procedural success are understandably miffed with WHO numbers saying we are dead last. I’m encouraged to congratulate them for what they do and for their success. But I’m also encouraging them to work as hard to understand that access to health care, be it to reduce infant mortality, to simple quality of life questions, is also important so that ALL OF US can better realize our potential.

I’m asked from time to time why I support the Democrats and the Affordable Care Act. After all, “We have the very best health care system in the world today, so why do you want to change it? How can you deny that you are really a socialist?” I don’t want to change that which works; I want to change that which doesn’t work, as evidenced by the WHO metrics.

Those of us who undestand economics and finance have long known that we have been heading for a socio-economic cliff with staggering consequences for a long time. Unlike our politicians on the right, we’ve been worried about this event and the consequences for our children and grandchildren.

There are now some steps being taken to limit the damage. I encourage you to become more aware of the obstruction and head in the sand approach from those who would eviscerate the PPACA and attempt to turn the clock back by 40 or 50 years. Yes, it needs to be tweaked, but that’s far better than replacing it with nothing which is what some would have us do.

By Kathryn Mayer / June 16, 2014

Despite having the most expensive health care system, the United States ranks dead last in the quality of its health care system when compared with 10 other western, industrialized nations, according to new analysis out Monday.

It’s the fifth consecutive time the United States has ranked last by reports ranking health care by the Commonwealth Fund. While other countries compared in the analysis have improved over the last decade, the U.S. has not, keeping with its lowest performance, while also spending far more on health care costs per person than any other country.

The United States spent $8,508 per person on health care in 2011, compared with $3,406 in the United Kingdom, which ranked first overall. It’s also significantly higher than Norway, who spent the second most on health care, at $5,669.

“It is disappointing, but not surprising, that despite our significant investment in health care, the U.S. has continued to lag behind other countries,” said the report’s lead author Karen Davis, a health researcher at the Johns Hopkins Bloomberg School of Public Health.

Other countries that were ranked in the study include Australia, Canada, France, Germany, the Netherlands, New Zealand, Sweden and Switzerland.

America’s ranking is “dragged down substantially by deficiencies in access to primary care and inequities and inefficiencies in our health care system,” researchers said.

The report found that the U.S. ranked last on measures such as infant mortality, preventable deaths, access to care based on affordability, efficiency and equity.

Specifically, the report found:
• The U.S. ranks last on every measure of cost-related access. More than one-third (37 percent) of U.S. adults reported forgoing a recommended test, treatment or follow-up care because of cost.
• The U.S ranks last in efficiency, due to low marks on the time and dollars spent dealing with insurance administration, lack of communication among health care providers and duplicative medical testing. Forty percent of U.S. adults who had visited an emergency room said they could have been treated by a regular doctor, had one been available; that’s more than double the rate of patients in the U.K. (16 percent).
• About four of 10 adults with below-average incomes in the U.S. reported a medical problem but didn’t visit a doctor in the past year because of costs, compared with less than one of 10 in the U.K., Sweden, Canada, and Norway.

Data for the 2014 report was collected before the Patient Protection and Affordable Care Act, so that the effects of the law may help boost America’s ranking in coming years, researchers said.

“The U.S. performance on insurance coverage and access to care should begin to improve, particularly for low-income Americans,” Davis said. “[PPACA is] expanding the availability and quality of primary care, which should help all Americans have better care and better health outcomes at lower cost.”

The Rise of Tactical Asset Allocation

retirement_roadMy Comments: Yesterday I talked about investment risk, and how we, both clients and advisors alike, should understand it. Today, I’m reposting an article that describes, for me, a way to help clients achieve their perceived objectives, and keep the risk element under control.

As before, risk is not to be avoided, but to be managed. It’s only with risk can we hope to realize our financial goals, which for most people is a bigger pile of money than you started with, one that will translate to peace of mind and a greater ability to enjoy life.

It’s somewhat technical, so if that turns you off, then either struggle with it or call me for an explanation. Or both.

Posted by Michael Kitces on Wednesday, June 20th, 2012

The foundation of investment education for Certified Financial Planner (CFP) certificants is modern portfolio theory, which gives us tools to craft portfolios that effectively balance risk and return and reach the efficient frontier. Yet in his original paper, Markowitz himself acknowledged that the modern portfolio theory tool was simply designed to determine how to allocate a portfolio, given the expected returns, volatilities, and correlations of the available investments.

Determining what those inputs should be, however, was left up to the person using the model. As a result, the risk of using modern portfolio theory – like any model – is that if poor inputs go into the model, poor results come out. Yet what happens when the inputs to modern portfolio theory are determined more proactively in response to an ever-changing investment environment? The asset allocation of the portfolio tactically shifts in response to varying inputs!

The evolution of the industry for much of the past 60 years since Markowitz’ seminal paper has been to assume that markets are at least “relatively” efficient and will follow their long-term trends, and as a result have used historical averages of return (mean), volatility (standard deviation), and correlation as inputs to determination an appropriate asset allocation. Yet the striking reality is that this methodology was never intended by the designer of the system itself; indeed, even in his original paper, Markowitz provided his own suggestions about how to apply his model, as follows:

“To use [modern portfolio theory] in the selection of securities we must have procedures for finding reasonable [estimates of expected return and volatility]. These procedures, I believe, should combined statistical techniques and the judgment of practical men. My feeling is that the statistical computations should be used to arrive at a tentative set of [mean and volatility]. Judgment should then be used in increasing or decreasing some of these [mean and volatility inputs] on the basis of factors or nuances not taken into account by the formal computations…
…One suggestion as to tentative [mean and volatility] is to use the observed [mean and volatility] for some period of the past. I believe that better methods, which take into account more information, can be found.”
– Harry Markowitz, “Portfolio Selection”, The Journal of Finance, March 1952.

Thus, for most of the past 6 decades, we have ignored Markowitz’ own advice about how to apply his model to portfolio design and the selection of investments; while Markowitz recommended against using observed means and volatility of the past as inputs, planners have persisted nonetheless in using long-term historical averages as inputs and assumptions for portfolio design. Through the rise of financial planning in the 1980s and 1990s, though, it didn’t much matter; the extended 18-year period with virtually no material adverse risk event – except for the “blip” of the crash of 1987 that recovered within a year – suggested that long-term returns worked just fine, as they led to a stocks-for-the-long-run portfolio that succeeded unimpeded for almost two decades. Until it didn’t.

As discussed in the 2006 Journal of Financial Planning paper “Understanding Secular Bear Markets: Concerns and Strategies for Financial Planners” by Solow and Kitces, the year 2000 marked the onset of a so-called Secular Bear Market – a one or two decade time period where equities deliver significantly below average (and often, also more volatile) returns. The article predicted that the sustained environment of low returns would lead planners and their clients to question the traditional approach of designing portfolios based on a single, static long-term historical average input (which leads to a buy-and-hold portfolio), and instead would turn to different strategies, including more concentrated stock picking, sector rotation, alternative investments, and tactical asset allocation. In other words, stated more simply: planners would find that relying solely on long-term historical averages without applying any further judgment regarding the outlook for investments, as Markowitz himself warned 60 years ago, would become increasingly problematic.

The Growing Trend of Tactical
Although not widely discussed across the profession, the FPA’s latest Trends in Investing study reveals that the rise of tactical asset allocation has quietly but steadily been underway, and in fact now constitutes the majority investing style. Although not all financial planners necessarily characterize themselves in this manner, the study revealed that a shocking 61% of planners stated that they “did recently (within the past 3 months) or are currently re-evaluating the asset allocation strategy [they] typically recommend/implement” which is essentially what it takes to be deemed “tactical” in some manner.

When further asked what factors are being re-evaluated to alter the asset allocation strategy, a whopping 84% of respondents indicated they are continually re-evaluating a variety of factors: 69% indicated following changes in the economic in general, 58% indicated they watch for changes in inflation, and another 58% monitor for changes in specific investments in the portfolio. Notably, only 14% indicated that they expected to make changes based on what historically would have been the most popular reasons to change an investment, such as changes in cost, lead manager, or other administrative aspects of the investment.

Although not directly surveyed in the FPA study, another rising factor being used to alter investment allocations appears to be market valuation, on the backs of recent studies showing the value and effectiveness of the approach, such as “Improving Risk-Adjusted Returns Using Market-Valuation-Based Tactical Asset Allocation Strategies” by Solow, Kitces, and Locatelli in the December 2011 issue of the Journal of Financial Planning, and more recently “Withdrawal Rates, Savings ratings, and Valuation-Based Asset Allocation” by Pfau in the April 2012 issue, along with “Dynamic Asset Allocation and Safe Withdrawal Rates” published in The Kitces Report in April of 2009.

Notwithstanding the magnitude of this emerging trend towards more active management, it doesn’t necessarily mean financial planners are becoming market-timing day traders. The average number of tactical asset allocation changes that planners made over the past 12 months was fewer than 2 adjustments, and approximately 95% of all tactical asset allocators made no more than 6-7 allocation changes over the span of an entire year, many of which may have been fairly modest trades relative to the size of the portfolio. In other words, planners appear to be recognizing that the outlook for investments doesn’t change dramatically overnight; however, it does change over time, and can merit a series of ongoing changes and adjustments to recognize that.

Tactical Asset Allocation: An Extension of MPT

At a more basic level, though, the trend towards tactical asset allocation is simply an acknowledgement of the fact that it feels somewhat “odd” to craft portfolios using long-term historical averages that are clearly not reflective of the current environment, whether it’s using a long-term bond return of 5% when investors today are lucky to get 2% on a 10-year government bond, or using a long-term historical equity risk premium of 7% despite the ongoing stream of research for the past decade suggesting that the equity risk premium of the future may be lower.

Consistent with the idea that financial planners are recognizing tactical asset allocation as an extension of modern portfolio theory and not an alternative to it, a mere 26% of financial planners answered in the Trends in Investing survey that they believe modern portfolio theory failed in 2008. For the rest, the answer was “no”, modern portfolio theory is still intact, or at least “I don’t know” – perhaps an acknowledgement that while MPT may still work, many of us lack the training in new and better ways to apply it. Nonetheless, that hasn’t stopped the majority of planners adopting a process of making ongoing changes to their asset allocation based on the economic outlook and other similar factors.

Unfortunately, though, perhaps the greatest challenge for planners implementing tactical asset allocation is that we simply aren’t trained to do so in our standard educational process. Some financial planning practices are responding to the challenge by investing in training, staff, and/or research to support a more tactical process. Others are responding by outsourcing to firms that can help; the Trends in Investing survey showed nearly 38% of advisors intend to outsource more investment management over the next 12 months, and 42% are already outsourcing more now than they were 3 years ago.

Regardless of how it is implemented, though, the trend towards tactical itself appears to have grown from a broad dissatisfaction amongst planners and their clients that the “lost decade” of equity returns has left many clients lagging their retirement goals. Even if diversified portfolios have eked out a positive return, it is still far behind the projections put forth when clients made their plans in the 1990s, forcing them to adjust by saving more, spending less, or working longer, to make up for the historical returns that never manifested. And as long as the secular bear market continues, the strategy will continue to be appealing. Ultimately, though, the sustainability of the tactical asset allocation trend will depend on it delivering effective results for clients.

So what do you think? Would you characterize yourself as a tactical trader? Is tactical asset allocation a short-term phenomenon, or here to stay? Is tactical asset allocation simply modern portfolio theory done right, or does it represent an entirely new investing approach?

The Paradox of Investment Risk

profit-loss-riskMy Comments: First, let’s both understand we are talking about financial risk. Second, financial risk for me is likely to be defined differently from how you define it. Third, there is always an element of uncertainty about any future outcome, whether it’s getting married, having children, accepting a new job, etc. Uncertainty implies a potentially unfavorable outcome for almost anything we do, but to the extent it is “risky” depends on our frame of reference.

For example, walking along the roofline of my house, at age 73, is much riskier for me that it might be for someone age 22, who is a chamption gymnast. Mind you that’s physical risk and not financial risk, but there are parallels when it comes to money.

I’ve just taken a step that caused me to reflect very carefully because it has caused me to trust someone to do something with my money that I personally cannot replicate. For me, I had to come to terms with the “risk” involved because it’s something I can’t do. The person who I’m trusting has done this successfully for the past 35 years. For him, it is considered safe and conservative. Only I don’t “know” that, so there is an element of risk involved.

by: Franklin J. Parker / Tuesday, June 17, 2014

Like most retail financial advisors, I have thought a lot about how to reduce both actual risk and the perception of risk in my client’s portfolios. Since 2008 we have all thought, rethought, written and rewritten about risk.

I focus on financial planning to help clients understand why they are investing. I have had discussions about why portfolio allocation helps to protect clients; I’ve used all the financial metrics and Monte Carlo simulations. But no matter the conversation, it seems that clients see themselves forever in danger of falling off a 1,000-foot cliff — a fall they feel is one small misstep away.

And this, to me, is the real problem with the current wealth management paradigm. We do hours of financial planning work: calculating different saving scenarios, market returns and retirement dates. But when it comes time to actually construct a portfolio, we give the client a risk-tolerance questionnaire that is entirely unrelated to their financial planning needs.

What if a client scores very conservatively on the questionnaire but actually needs a more aggressive portfolio? Or vice versa? To not use the financial planning process to directly inform the investment management process makes no sense to me. Well, actually it does.

Let’s be honest: As an industry, planners continue to use risk-tolerance questionnaires because they are defensible in court. But these do the client a disservice; they let advisors avoid the real conversations our clients need.

We must ask clients which competing risks they are willing to accept: Are you willing to accept the risk of not retiring on time? If not, are you willing to take on more portfolio risk? That is the proper role of a risk-tolerance questionnaire: to inform the conversation about risk, but not to dictate it.

It is an easy thing to calculate the return requirement of a future goal. It seems sensible to assign a portfolio allocation that has the best likelihood of achieving that goal. And, taking this idea a step further, it is not a hard thing to figure out the maximum loss a portfolio can sustain before a plan gets derailed. You can even dust off the old stop-loss tool to help limit the risk of those catastrophic losses.

Using such a process might help give clients context, and a better sense of the risks they are actually willing to take. By assigning a loss threshold coupled with some hedging strategies (even as simple as stop-losses), we can help clients better understand which losses are tolerable and which are not.

This may be the point. As retail advisors, it is our job to keep clients rational and on track. With some safety nets, we may be able to help clients stay rational and not fear that 1,000-foot cliff so viscerally.

Franklin J. Parker is managing director of CH Wealth Management in Dallas.

Eric Cantor’s Defeat is a Shaft of Light in Dark Political Times

global investingMy Comments: There is nothing I can add to this except encourage you to read it.

By Jurek Martin / June 12, 2014

The House majority leader’s defeat disproves the hypothesis that money is all there is

These had not been the best of times in America. A seemingly endless round of shootings in public places – schools, Walmarts, pizza parlours – is bad enough. Events in Iraq and Syria, now one miasma of misery and violence, compound the gloom. Even good economic news is overshadowed by what looks like another high-tech stock market bubble of rampant speculation.

But on Tuesday there was a sudden, unexpected shaft of light. Eric Cantor, number two Republican in the House of Representatives and a possible next speaker, lost a primary election in Virginia to an unheralded and underfunded libertarian economics professor, David Brat, who wants to take the country back in time a good 200 years. Yet again, the result demonstrated that no establishment politician is safe while the insurgent right is on the rampage, crusading under its anti-immigration banner.

So why is this good news? First, the disappearance of Mr Cantor – arrogant, ambitious beyond belief and a conservative ideologue of the most dangerous kind because he is not stupid – can only help restore the tattered fabric of civic and political dialogue. Prof Brat will not improve it but he is a minnow while Mr Cantor is, or was, a seriously big shark.

Second, his departure frees up John Boehner, the speaker of the House, to lay before his chamber the comprehensive immigration reform bill already passed by the Senate. He has often said he wants to, because he knows his party’s anti-immigrant stance greatly reduces its chances of ever winning a national election in which new Americans vote in ever greater numbers.

But he has lacked either the guts or the imagination to face down the hard line conservative bloc, which danced more to Mr Cantor’s tune than his own. If I were him, I’d bring up the bill tomorrow. It may lose or it may be carried with Democratic support, but it will at least clear the air on one of the great issues of our time.

There is much talk that Mr Boehner is thinking of stepping down anyway, worn out by the task of herding the wildcats that constitute his party. At the very least, he may be challenged for the speakership, assuming the Republicans retain control of the House in November’s midterm elections – if not, in the wake of his defeat, by Mr Cantor then by a fistful of others even further to the right than his deputy.

What better way to leave a legacy than an act of brave leadership, going against his own party’s xenophobic grain. It might even in the longer haul save the party from itself. Mr Boehner could then exit trailing clouds of glory, even at the cost of committing party apostasy.

There is a third reason to take comfort in Mr Cantor’s defeat. He spent about $5m on his campaign, 20 times more than Prof Brat. According to one report, his restaurant entertainment expenses, largely for his army of well-paid advisers, nearly equalled his opponent’s total outlays. Taken at face value, this disproves the hypothesis that money – especially out-of-state funding brought in by the truckload by shadowy donors protected by crass Supreme Court rulings such as Citizens United, which in 2010 removed legal restraints on financial contributions from outside groups – is all there is in politics.

In Mississippi Thad Cochran, the entrenched Republican senator awash in establishment money, has been forced into a run-off he may well lose by a Tea Party-backed candidate. The insurgent also won a lot of out-of-state funding, from groups such as the Washington-based Club for Growth, but much less than the incumbent.

If it were not Mississippi, arguably the most reactionary state in the union, the 30-year Republican hold on the seat might be in danger in November, as was proved to be the case in more representative states such as Indiana, Kansas, Nevada and Delaware in the last two election cycles, when Tea Party candidates went down in the flames of their own extremism.

Of course, it is wishful thinking to imagine American politics will get off the money train – just as it is to hope that the hail of bullets that so often take lives in schools and shops will move the body politic to do anything serious about guns. A frustrated President Barack Obama summed it up well this week by saying that other countries had plenty of crazy people but didn’t have the ammunition piled up to implement their madness.

But the National Rifle Association will not allow this to change. Recently it even took down from its website a post mildly critical of rallies in which people provocatively flaunt their guns. Ironically, Mr Cantor liked to provoke as well – and now he has been taken down; eaten, as it were, by the revolution he helped foment.

Want to Increase Hospital Revenues? Engage Your Physicians

My Comments: Keeping more of what you earn resonates with a lot of people. I recently found a newly minted idea that dramatically increases ones ability to keep more of what you earn. It dovetails with this post about physicians. But it is not limited to physicians and hospitals, but to virtually any successful small business owner. It’s quick, its easy, it passes muster with the IRS and if you are intrigued by what this might mean for you, get in touch with me.

by Jeff Burger and Andrew Giger / June 05, 2014

When doctors are frustrated, patient care and hospital revenues suffer. Here’s how to boost physicians’ engagement — and the bottom line.

Four key practices consistently drive physician engagement.

Physician burnout is on the rise. About four in 10 physicians reported feeling dissatisfied in their medical practice (42%), according to research by Jackson Healthcare.

Many feel that regulatory and reimbursement restraints inhibit their medical practice. The volume of time spent on paperwork also disconnects doctors from their patients, potentially compromising patient care. As private practice becomes increasingly associated with administrative hassles and overwhelming overhead, more physicians are leaving medicine altogether or choosing to become hospital employees.

When physicians feel frustrated and inhibited in their medical practice, both patient care and hospital revenue suffer. But there are steps any hospital can take to engage its physicians, whether they are employed or affiliated. And making those changes can have a significant and positive impact on patients and the hospital’s bottom line.

Engaging physicians
As one health system began employing more physicians, it contacted Gallup to discover how to engage them. After collecting data from the health system and assessing physician engagement, Gallup differentiated physicians with emotional equity in the health system from those who did not buy in — and discovered a strong relationship between physician engagement and productivity.

Gallup found that physicians who were fully engaged or engaged were 26% more productive than physicians who were not engaged or who were actively disengaged. This increase equates to an average of $460,000 in patient revenue per physician per year. In other words, this health system could improve its bottom line by nearly half a million dollars a year each time it successfully engages one of its less engaged physicians.

Another health system recently sought Gallup’s help in building engagement among community physicians with referral privileges. After collecting data and analyzing physician engagement, Gallup again differentiated physicians who had confidence and emotional equity in the health system from those who didn’t.

When comparing this system’s physician engagement data with referral volume, Gallup found that fully engaged and engaged physicians gave the hospital an average of 3% more outpatient referrals and 51% more inpatient referrals than physicians who were not engaged or who were actively disengaged. By implementing strategies to connect with and engage community physicians, this provider could drive revenue and encourage corporate growth.

Engagement and the bottom line
Gallup’s analysis in these two studies suggests that four key practices consistently drive physician engagement:
1. Proactively address and provide solutions for physician problems, especially those related to health reform changes.
2. Promote effective communication between physicians and system administrators.
3. Encourage physician involvement with hospital administration, and ensure physicians’ opinions are heard.
4. Go above and beyond to give physicians opportunities to grow professionally and learn from more experienced physicians.

For example, hospitals could promote their physicians’ expertise by publicizing them as speakers in their community or by providing new physicians with a mentor.

By strategically and consistently applying Gallup’s strategies for building physician engagement, hospital leaders and executives can capitalize on opportunities to grow relationships with employed and affiliated doctors. Improving physician engagement not only leads to increased hospital revenue from higher physician productivity and referral, but it also ultimately promotes higher quality patient care.

Reverse Mortgages: What You Need to Know That’s Under the Hood

real estateMy Comments: There is both good information and there is bad information out there about reverse mortgages. My understanding of them makes them very useful financial tools under the right circumstances. But they can be complicated and they can be expensive if not used properly.

I’ve had several clients over the years who have put them to good use. The proceeds were placed in a guaranteed contract and a check shows up every month. It is usually enough to buy groceries and gas for the car. In effect, they turned the back two bedrooms of their house into a monthly income stream that allows them to eat and get around. It’s also OK that they can sleep in those rooms knowing no one can evict them.

I like them, and will continue to recommend they be used when the situation suggests they will provide realistic and helpful financial relief. There are other creative uses for them that are beyond the scope of this post.

By Mike Patton May 12, 2014

Over the past few years we’ve seen an explosion in reverse mortgage advertising. Celebrities such as Fred Thompson and The Fonz (Henry Winkler) have relentlessly touted the benefits of these financial instruments as a way to solve the income problem of retirees. A private REIT, Reverse Mortgage Investment Trust, is reported to have raised $230 million this year, betting on a market resurgence of reverse mortgages, which suffered a sharp decline coincident with the housing crisis.

Are these tools as beneficial as Fred and The Fonz claim? We’ll discuss how they work, how they’re taxed and what you, as an advisor, need to know to advise your clients who may ask you about reverse mortgages.

How they work
A reverse mortgage is a tool which allows a homeowner to withdraw equity from his home. It does not involve a sale of the home, hence, ownership is never relinquished. The marketplace for reverse mortgages is fairly consolidated. As much as 95% of all reverse mortgages are written through a Home Equity Conversion Mortgage (HECM), regulated by the federal Department of Housing and Urban Development (HUD) and available only through an approved Federal Housing Administration (FHA) lender. To qualify for a HECM reverse mortgage, the following criteria must be met:
1) The homeowner must be at least age 62. If the property is owned jointly, the youngest titleholder must be at least 62.
2) The property must be a single family dwelling, an approved FHA condo, or a multiple family home which contains at least two but not more than four units.
3) The home must be the primary residence of, and occupied by, the homeowner.
4) If the home is leveraged, the equity in the home must be sufficient to pay off all mortgages, liens or legal obligations against the property.

To satisfy the residence rule, the homeowner must reside in the home for at least 183 days per year and confirm this by signing an Annual Occupancy Certificate. If this is a problem due to the homeowner’s health or work situation, the homeowner must notify his Servicer. If the homeowner is out of the home for 12 consecutive months, the loan could be in default.

If the homeowner rented the property, it would no longer be considered his primary residence, and the loan would be in default. Also, the homeowner must continue to pay insurance and property taxes and maintain the property in accordance with FHA requirements.

The proceeds
Money received from a reverse mortgage is considered to be a loan, and as such, is not subject to income tax. In addition, the maximum amount a homeowner may receive from a HECM reverse mortgage is based primarily on the:
1) appraised value of the home
2) age of the individual (or couple)
3) prevailing interest rates
4) government-imposed lending limits.

Who benefits most, an older or younger person? Assuming all else is equal, an older person will be able to receive a larger benefit each month. However, if a younger person establishes a reverse mortgage, and does not draw upon the line of credit, they will benefit more than an older person. This is because the line of credit will grow and the amount which may be withdrawn will be greater than if an older person did the same.

The funds can also be structured in a variety of ways, including:
1) a lump sum
2) a monthly payment
3) a line of credit
4) some combination of each.

The income may be paid out over the lifetime of the homeowner (and spouse, if the home is owned jointly) or for a specified number of years.

Expiration of program
What happens if the homeowner dies? What if the homeowner is placed in a nursing home or assisted living facility? One of the requirements of a reverse mortgage is that the homeowner continues to reside in the property. Under the criteria listed above, the homeowner would thus fail to meet these criteria and the loan would need to be repaid. If the homeowner didn’t have the financial resources to repay the loan, the home would have to be sold. After the home was sold, any surplus which remains after repaying the loan would accrue to the homeowner or to his estate.

However, what if there wasn’t enough equity to repay the loan when it was sold? The lender would request reimbursement from the FHA. In short, other than the home itself, no other assets would be attached to the agreement.

The bottom line

As you can see, reverse mortgages are fairly complex instruments and as such, should not be implemented without due consideration and proper guidance. Fortunately, there are a number of resources available such as the website of the National Reverse Mortgage Lenders Association (NRMLA). This Washington, D.C.-based organization exists to educate consumers and train lenders on the pros and cons of reverse mortgages. For more about reverse mortgages, visit http://www.reversemortgages.com.

Although, this may be a good idea for some clients, there are many issues to consider prior to entering into a reverse mortgage agreement. Prudence dictates that you learn as much as you can and recommend them only as a part of the client’s overall plan. It’s best not to wait until a client runs out of money before implementing this strategy. Since there is usually no annual fee to maintain a reverse mortgage as a line of credit, why not establish it in advance? Then it will be available if needed.

Should Your Investments Include Europe?

global econ 3My Comments: Europe has been in the news a lot recently. President Obama is/was over there, it’s the 70th anniversay of D-Day, the Ukraine is a basket case waiting to get resolved, and so on. And all this time, people have investments and between dealing with the heat of summer and the need to take a vacation, somewhere, in a lonely section of their brain, circuits are opening and closing as questions about their money surface from time to time.

For those of us who find ourselves in these kinds of weeds on a daily basis, it becomes part of the background noise that leads us to make decisions on behalf of our clients, decisions that we hope will make life easier, for us and for them.

This comes from a thought leader that I think is pretty good. It’s worth your time to read. But don’t let yourself get too deep as it might interrupt your vacation.

posted by Jeffrey Dow Jones June 5,2014 in Cognitive Concord

The big story this week is the European Central Bank. Early this morning, Mario Draghi did something historic. He cut the deposit rate to negative 0.10%.

This makes them the first central bank in the world to use a negative deposit rate. It sounds pretty dramatic, right? Negative interest rates mean you pay somebody else to hold your money. Who on earth would do that?!

As it turns out, that’s exactly the point. When it costs money to hold funds on deposit, it creates a disincentive to do so. That disincentive to hold cash theoretically creates more capital movement, hopefully, consumption and investment. It’s supposed to be stimulative.

At the macro level, a negative rate makes people dislike the Euro. And a strong Euro has been one of the bigger problems over there for some time now. Strong currencies make a country’s exports relatively more expensive, and that translates into lower GDP. Supposedly a weaker Euro might stimulate a bit more economic growth.

Europe is in a really weird spot. They have a single currency and they have a central bank, but they don’t have a political union nor do they have any kind of unifying fiscal union. It’s just a bunch of really different countries that all share a currency. It’s the biggest experiment in monetary history.

Look, they’ve gotta do something. Inflation has been trending lower and lower and lower and is now officially in the Danger Zone.

It’s been a long time since we’ve talked about this. But that chart is one of the most important charts in the world right now. The Eurozone is the world’s largest economic entity. And the world’s largest economic entity has been pretty sick for a while. They’re doing everything they can to keep this next chart from dipping back into negative territory:

Will Europe be OK? Will GDP hold? Let’s ask the market:

That’s Europe, folks.

It’s up over 50% in the last two years.

Let me ask you a question: is this a market that is concerned about recession?

Is this a market worried about deflation?

Clearly, equity investors over there think everything will be just fine. Markets are forward looking things and what they see right now is no recession, no deflation, no problem. They could certainly be wrong about that, but when markets do get it wrong, they tend to react rather quickly when evidence starts emerging that they are. This is the equity benchmark that investors really ought to be paying attention to right now. I think a(nother) European recession is the single biggest risk for investors right now, or at least the one with the biggest possible global impact relative to its probability.

I’ve been bullish on European stocks since last summer. Alpine Advisor Pro subscribers will remember our macro move away from the U.S. and into more favorably-valued Europe.

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Generation Z, the world’s saviour?

bruegel-wedding-dance-ouMy Comments:
1)  call me slow, but I’ve not heard of Generation Z.
2)  does the world need a saviour?
3) never mind the spelling; this comes from the Financial Times, which comes from London.
4) I was once in the 16-25 age group and look at me now.
5) without Eric Cantor, who is going to be in charge of the GOP contingent in the House?

By Brian Groom / June 2, 2014

Alcohol-related crime is declining.

Can “Generation Z”, or whatever label you want to put on today’s 16 to 25-year-olds, be the superheroes who save the world? Surely somebody needs to. Raised in the shadow of recession, they seem a hard-working, ambitious bunch and notably less hedonistic than their predecessors. Boring, some say.

Binge drinking is down in the UK, while the numbers of those who do not drink alcohol at all have risen. Young people smoke less and take fewer recreational drugs. Violence is falling, as it is in many developed countries, possibly in part because of the lower alcohol intake.

After the counterculture fad of my generation and the clubbing and boozing habits of those that followed, it seems a welcome relief. No doubt it is a necessity for many. “I can’t lose my job,” said a 24-year-old woman who works for a fashion magazine in London. “I’ve had to fight to get it and I know that, if I sauntered into work smelling of booze, I’d just be replaced.”

For others, it is a form of rebellion against the previous generation’s excesses. Those who belong to the Straight Edge subculture, for example, say they do not smoke, drink or take drugs. “The only thing I go to the pub for is to watch rugby, not to pull and not to get wasted,” said a 20-year-old student.

Could this generation apply its self-denying approach to cleaning up public life? So much needs doing, it is hard to know where to start. Take sport. The most recent allegations that secret payments helped Qatar to win the bid to host football’s 2022 World Cup is the latest in scandals from drug-taking in athletics and cycling to spot-fixing in cricket.

Or finance. Last week Christine Lagarde, head of the International Monetary Fund, said progress on building a safer financial system was too slow because a “fierce industry pushback” was delaying reforms, despite scandals including money laundering and manipulation of the London interbank offered rate.

As for politics, last week’s surge of support for populist parties in the European Parliament elections was a howl of protest against establishment parties, immigration and austerity.

Expecting Generation Z to sort this lot out may be optimistic. They are a collection of individuals, not a movement. They are also young, and many choose not to vote, so their influence is limited. Reform, in any case, is needed well before they grab hold of the levers of power. So this is, for now, one of those “questions to which the answer is no” that journalists love. Yet this generation has a long-term interest in a cleaner, better world. After all, its members will have to work until they are at least 70 before receiving pensions, and many will live beyond 100.

On the right track
This month brings anniversaries of two of England’s most-loved poems, Edward Thomas’s Adlestrop (1914) and Philip Larkin’s The Whitsun Weddings (1964), which both involve trains. In Thomas’s poem, a steam train carrying the poet made an unscheduled stop on a hot afternoon at a Cotswolds hamlet: “No one left and no one came.” Its evocation of rural England carried overtones of the coming first world war, in which Thomas died three years later.

Larkin’s poem describes a journey from the east coast city of Hull to London on Whit Sunday, when couples often marry. He notices wedding parties joining at each station: the poem mordantly depicts glimpses of England, the couples’ separate yet parallel lives and their futures. It will be celebrated on Friday with a 200-mile onboard performance involving actors and the author’s favourite jazz tunes. I am not sure what Larkin, a famous grump, would have made of this.

Reverse ferret
Ferrets used to be kept mainly for hunting rabbits but are increasingly kept as pets – and they are divisive. Bill de Blasio, New York’s new mayor, seems poised to repeal a 15-year ban on domesticated ferrets after officials said that, though they can bite, they were no more dangerous than other pets.

New York City’s ferret ban was introduced in 1999 by Rudy Giuliani, then mayor, who entered into a memorable spat on the radio with David Guthartz, executive president of the organisation New York Ferrets’ Rights Advocacy. “There’s something deranged about you,” Mr Giuliani told Mr Guthartz. “You should go consult a psychologist or a psychiatrist, and have him help you with this excessive concern, how you are devoting your life to weasels.”

The Return of the Inflation Chupacabra

My Comments: A few weeks ago I wasted several hours exchanging replies with someone who asked “who is responsible for inflation?” My initial response was to the effect it is a “what” question and not a “who” question.

But that soon devolved into discussion about irrelevant issues that I decided meant the writer had never taken Economics 101, much less passed it. By the fourth day, it was obvious he had heard on Fox News that the Fed was evil incarnate, and he was looking for confirmation. I couldn’t give it to him.

Inflation, in moderation, is a good thing. That’s mainly because deflation to any degree means we are sliding backward into a pool from which escape is very difficult. Since equilibrium is virtually impossible given the number of people on the planet and inevitable lag times between supply and demand, some inflation is desirable. Just not too much.

posted by Jeffrey Dow Jones May 29,2014 in Cognitive Concord

The first quarter GDP was revised lower. It was the first time the economy contracted since 2011, an annualized rate of -1.0%. The market celebrated by making a new all time high!

I wrote for Pro Subscribers last month that a new high in the market would indicate that the “sideways” market we’ve had in 2014 might be coming to an end. The market did indeed break out to a new all time high and it did it quickly enough inside my expected time horizon to maintain a sense of bullishness about the market.

The funk of the first few months of a year may be wearing off. And GDP this quarter is projected to increase at a 3.5% clip.

There aren’t any major other warning signs flashing right now, either. Yes, what’s happening in small caps and certain pockets of technology might be indicative of broader volatility to come. But as I’ve written about repeatedly, as long as earnings keep growing the market is a fundamental buy.

Wait until companies start lowering earnings guidance before adopting too bearish a stance. In the meantime, let’s shift our focus to a long-forgotten topic around these parts. Inflation!

The Return of the Inflation Chupacabra

The reason why the world spends so much time speculating about Fed Policy and interest rates is that it matters to the market. If you think it doesn’t, let me ask: how would you feel about the stock market if cash paid you 3%?

Because that’s what the Fed says the overnight rate may be by 2016 or 2017.
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There Isn’t Going To Be A Crash Anytime Soon

080519_USEconomy1My Comments: Last week I posted an article that suggested you be very cautious with your investments going forward. This article says “never mind”, all is well, keep going.

Unfortunately, from my perspective, both are completely rational, plausible, and probably accurate. Which means that I have no earthly idea how this is going to play out. One thing I do agree  with this author about is there is not going to be a giant market drop anytime soon. Those things come along about once every 65-75 years which means most of us will be dead before the next one.

In the meantime, find someone to help you maintain a healthy balance, with the ability to adjust quickly to changing fortunes, leaving you at the end of the day with more money than you started with. Go here to see my best soluttion: http://goo.gl/Z5iICf

Jun. 8, 2014 1:01 AM ET

Summary
• The SPY is not rising out of control and there is a lot of data to prove it.
• As of May 2014, the Domestic Market Capitalization of the main U.S. Exchanges was $24.9 trillion, not that drastically higher than the 2007 and 2008 time period.
• For ETFs like SPY, there will continue to be allocations away from other smaller capitalization companies to companies indexed by the SPY ETF.

Introduction
For the last few months, the amount of articles published about the “impending market meltdown” has gotten a bit excessive after considering the contributors’ conclusions and how they reached them (using some sort of data set with no actual triangulation of ideas). So here is my shot at this topical obsession.
Just a general note, my position on the markets is that market levels are just not that out of the ordinary. I strongly believe that market levels are warranted and I have the data to back it up. This article will mainly cover the objectivity of a sound SPY investment and how investors should not be too worried about ridiculously volatile changes in the market (there will not be another giant market drop anytime soon).

Instrument of Choice: SPDR S&P 500 (SPY)
The SPY seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index. The Trust holds the portfolio and cash and is not actively managed. To maintain the correspondence between the composition and weightings of portfolio securities and component stocks of the S&P 500 Index, the Trustee adjusts the portfolio from time to time to conform to periodic changes in the identity and/or relative weightings of Index Securities.

Below is a summary of indices, comparing the S&P 500 index to the rest of the major indices. It’s fairly easy to point out that SPY is not narrow enough to be classified as a “narrow” indicator and not broad enough to be a “broad” indicator (I consider the Russell 2000 a broad index), so this will need to be kept in mind throughout the remainder of the article. Overall, the SPY has captured a significant portion of the 2013 to 2014 price rises and that may be a direct link to market confidence; however, this is a premature conclusion and will need more than just loaded statements to defend my position on the market (that a market crash is not coming anytime soon and current levels are not that out of the ordinary).


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